Tuesday, April 8, 2014

Labor markets have demand and supply elasticity

Timothy Taylor at the Conversable Economist has a post about long duration unemployment among older workers, referencing and article from Neumark & Button, through the San Francisco Federal Reserve Bank. The article notes that old workers tended to have much longer unemployment duration in this recession, compared to previous recesssions. The authors assume that employers are the cause, but they don't find evidence that older workers in states with stricter anti-discrimination laws fared better.

Timothy makes some good comments about the unintended consequences of interventionist policies. But everyone here is making the typical mistake of assuming that supply of labor is completely inelastic and that all changes in employment behavior are a product of employer behavior and preferences. No mention is made of the unprecedented level of extended unemployment insurance and the tendency, as unemployment insurance is extended to longer durations, the pool of beneficiaries will skew older. Clearly this policy will have an adverse effect specifically on older worker unemployment durations.

Further, and especially in the face of this unprecedented policy, no thought is given to the possibility that any household might have any priorities other than attaining new employment as soon as possible.

At this point, unemployment durations are very close to normal, except for about 1 1/2% of the labor force which has been unemployed for a very long time. So, we could assume that 98 1/2% of labor supply is inelastic. One does not have to be cynical or misanthropic to consider the possibility that 1 1/2% of the labor force may have some discretion about how they return to employment. And, clearly, older workers would have more discretion than younger workers. And, clearly, workers with some discretion, who might normally have somewhat longer unemployment durations, will have even more discretion if they are beneficiaries of more generous unemployment insurance.

Nobody has to be gaming the system, nobody has to be lazy, the recession doesn't have to be the result of voluntary "vacations". It might be possible that an exceedingly small portion of the labor force might just have slightly more agency and discretion than an orphan in a Dickens novel. One and one-half percent of the labor force might just have some savings in place with which to buffer a bad labor market.

This doesn't have to be the only reason for the long term unemployment situation. It doesn't even have to be the main reason. But, it's a shame that so many analyses don't even allude to this obvious factor. It's understandable, given the cynical public shaming that tends to answer this sort of commentary. But, it's a shame that public policy with seen and unseen consequences is so commonly discussed in an environment where obvious facts are not-to-be-named - especially when this policy change was so starkly different than any other previous regime and the resulting labor market behavior was so starkly different than it had ever been before, in precisely the way one would have predicted if one expected EUI to have adverse effects on unemployment duration.

PS: The relationship I am talking about is noticeable in this graph. Here I divided the unemployed into two groups, those unemployed for less than 26 weeks and those unemployed for more than 26 weeks. Normal UI covers 26 weeks, and the recent EUI policy covered up to 99 weeks - a period much longer than in any previous recession. Until 2008, the unemployment durations of workers in these two categories moved with a fairly tight relationship. But, after 2008, when very generous EUI was implemented, the durations of >26 week unemployment became highly inflated compared to <26 week unemployment. The green line is the average unemployment duration we would expect to see among the >26 week unemployed, given the duration we see in the <26 week group.